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Bar News - April 22, 2005 Ferreting Out Ownership of Patents and Trademarks in Aquisitions Intellectual property is big business today. The values of IP portfolios have skyrocketed in recent years, making the companies who own them lucrative targets for acquisitions. Take the following hypothetical: You have been hired to represent Company A in an acquisition of Company B. Company B claims to have some very valuable IP assets, including various patents and copyrights. Do they actually possess these assets? Companies do not do the inventing - the subject of patents; employees do; similarly, it is employees, not companies, that fix an original thought in a tangible medium - the subject of copyrights. For this reason, the laws of ownership of these two types of intellectual property are increasingly complex. What follows is a summary of who owns patents and copyrights. Patents are the heart and soul of most IP portfolios. Some jurisdictions have statutes that define the ownership of employee inventions; New Hampshire, however, relies completely on case law. State law, generally, controls the ownership of employee inventions and must give way to federal laws only if the state law would create a conflict with federal patent policy. All jurisdictions begin with the maxim that employees own patent rights to an invention that they conceive and/or reduce to practice. There are, however, three exceptions to this rule. The first is that an employer owns an employee's invention if there exists an express, written employment contract that states that the employee's inventions shall be assigned to the employer. Vigitron, Inc. v. Ferguson, 120 N.H. 626, 629-630 (1980). The second exception is that an employer owns employee inventions if the employee was specifically hired to invent, was told to solve a particular problem at some point after the employment had begun, or was told generally to use his inventive faculties, even if there is no express agreement that mentions patent rights. In litigation, the burden of proof is on the employer who claims patent ownership via an employer's instruction to invent. E.g., State Bd. of Ed. v. Bourne, 7 So.2d 838, 841 (1942) (employer must show beyond question that employee was hired for the specific purpose of making the invention). The final exception to the basic rule of patent ownership in the commercial context is the "shop right" doctrine. A shop right is a nonexclusive, nontransferable, and royalty-free license to make use of (not to manufacture or sell) the invention that is granted to the employer. E.g., Cal. E. Lab., Inc. v. Gould, 896 F.2d 400, 402 (1990). This implied license arises out of equity because, when an employee uses his employer's resources in order to conceive and/or reduce an invention to practice, it is only proper that the employer derive a use from the invention. Further, a shop right is not an ownership interest in the patent; it simply operates as a defense to a charge of patent infringement. The shop right rule, moreover, only arises if the employee was not hired to specifically invent. Vigitron, 120 N.H. at 631. It is universally recognized that a shop right license is non-transferable; thus, it is limited to the company and cannot be assigned, sold, or licensed. It may, however, be transferred when the entire business merges with another company or when the entire business is acquired by another company. See Lane & Bodley Co. v. Locke, 150 U.S. 193 (1893); Neon Signal Devices, Inc. v. Alpha-Claude Neon Corp., 54 F.2d 793 (W.D. Penn. 1931). Copyright Ownership Copyright ownership presents its own unique set of considerations. Bear in mind that the ownership of copyrights is codified in Title 17 of the United States Code, the Copyright Act of 1976. As such, any dispute over the ownership of a copyright is governed solely by federal law. The first inquiry to be made is whether the copyrighted material is a "work for hire." If it is, then the employer is considered the author of the work. 17 U.S.C. § 201(b). The definition of a work for hire is either (1) a work prepared by an employee within the scope of his/her employment, or (2) a work specifically ordered or commissioned. 17 U.S.C. § 101. Courts were left to decide when an employment relationship exists, and when the copyrighted work was created within the scope of employment under the first prong of the work for hire doctrine. The general common law principles that the courts relied upon were the definitions given in the Restatement (Second) of Agency. An employee is any person over which the hiring party has the right to control the manner and the means by which the work is accomplished. Further, a work is within the scope of the employment if: (1) it is the kind of work the employee was hired to perform; (2) it occurs substantially with authorized work hours and space; and (3) it is undertaken, at least in part, by a purpose to serve the employer. Restatement (Second) of Agency § 228 (1958). The second scenario of the work for hire test is whether the work was specially created or commissioned. The courts determine whether a work is specially commissioned by evaluating all of the surrounding circumstances, with the determining factor being whether the motivating factor in producing the work was the person who requisitioned and induced its creation. E.g., Playboy Enters., Inc. v. Dumas, 53 F.3d 549, 562 (2d Cir. 1995). As such, an express contract requisitioning a work is often enough to show that the requestor is, in fact, the owner of the copyright. Further, the Copyright Act of 1976 affirmatively states that a work cannot be a specially commissioned work under the work for hire definition unless there is a written agreement signed by both parties that the commissioned work will be a work for hire. 17 U.S.C. § 101. As the foregoing demonstrates, ownership of patents and copyrights can be quite complex. Due diligence requires investigation into the ownership of patents and copyrights. With patents, investigations are required to determine whether the inventions are covered by employment agreements that give the company ownership rights, whether the employees were hired to invent in the absence of an express contract, or whether the company merely has a shop right to make use of the inventions. Likewise, with copyrights, it must be determined whether the copyrighted work was created by an employee within the scope of his/her employment, or whether it was specially commissioned. With the high value placed on intellectual property today, your client does not want to be in a position of caveat emptor. Paul C. Remus is Chair of the Patent Group of Devine, Millimet & Branch. He may be reached at premus@devinemillimet.com and is pleased to answer questions about IP issues, jogging or rowing. John Kanazawa is currently working with the Patent Group of Devine, Millimet & Branch. He has a degree in biophysical chemistry and will receive a Master of Intellectual Property, Commerce and Technology from Franklin Pierce Law Center. He may be reached at jkanazawa@piercelaw.edu. |
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